DSCR (Debt Service Coverage Ratio) Calculator
What is the DSCR Calculation?
The Debt Service Coverage Ratio (DSCR) is a critical financial metric used by real estate lenders and investors to measure a property's ability to cover its debt obligations with its own generated income. Unlike residential mortgages that focus on personal income, commercial and investment loans focus primarily on the property's cash flow.
How to Calculate DSCR
To calculate the ratio, you need two primary figures:
- Net Operating Income (NOI): This is the total income generated by the property (rental income, laundry, parking) minus all operating expenses (taxes, insurance, maintenance, utilities). It does not include income taxes or the mortgage payment itself.
- Total Debt Service: This is the total amount of principal and interest payments due over a one-year period.
Understanding Your DSCR Results
Lenders use this ratio to assess risk. Here is how they typically interpret the numbers:
- DSCR < 1.00: Negative Cash Flow. The property does not generate enough income to cover the mortgage. This is a high-risk scenario for lenders.
- DSCR = 1.00: Breakeven. The property generates exactly enough to pay the debt, with nothing left over for emergencies or profit.
- DSCR > 1.20: Standard Requirement. Most commercial lenders look for a minimum DSCR of 1.20 to 1.25 to provide a "safety cushion" for the loan.
Real-World DSCR Example
Imagine an apartment complex with a Gross Annual Income of $200,000. After paying $80,000 in operating expenses, the NOI is $120,000. If the annual mortgage payments (Principal + Interest) total $100,000, the calculation is:
$120,000 / $100,000 = 1.20 DSCR
In this case, the property has 20% more income than required to service the debt, making it a viable candidate for most investment property loans.
Why Lenders Prefer High DSCR
A higher DSCR indicates that a property is well-positioned to handle unexpected vacancies or rising maintenance costs. For the borrower, a strong DSCR often leads to better interest rates and more favorable loan terms, as the perceived risk of default is significantly lower.